529 B.R. 793
S.D. Fla.2015Background
- Isbell filed an involuntary bankruptcy petition against DM Records in the Southern District of Florida (Bankr. ECF No. 1).
- DM Records challenged the petition, arguing it had at least twelve creditors and that the petitioning creditors failed to meet §303(b) requirements; it had listed 28 creditors on Rule 1003.
- After amendments, DM Records’ Rule 1003 list grew to 33 creditors; Isbell challenged which creditors could be counted under §303(b).
- The bankruptcy court held DM Records had at least twelve creditors on the petition date but found material facts about whether DM Records paid debts as they came due.
- The district court affirmed, holding that royalties claimed by music publishers were not recurring debts and thus counted toward the creditor tally; the involuntary petition was procedurally improper unless two additional petitioning creditors joined.
- Isbell appealed the bankruptcy court’s ruling; the district court ultimately affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether there were at least twelve creditors on the petition date | Isbell contends many listed creditors should be excluded as small/recurring. | DM Records argues the creditors, including nonrecurring royalties, count toward twelve. | DM Records had at least twelve creditors; petition improper. |
| Whether royalties are recurring debts for §303(b) purposes | Isbell argues royalties are recurring expenses and should be excluded. | DM Records argues royalties are nonrecurring until sale occurs. | Royalty payments are not recurring debts and count as creditors. |
| Mootness of the pay-as-debts-due issue | If fewer than twelve creditors, summary judgment on paying debts would matter. | No need to decide if involuntary petition dismissed for lack of creditors. | Moot; not addressed. |
Key Cases Cited
- Denham v. Shellman Grain Elevator, Inc., 444 F.2d 1376 (5th Cir. 1971) (small recurring debts excluded from creditor count)
- In re Atwood, 124 B.R. 402 (S.D. Ga. 1991) (treatment of small recurring credits under §303(b))
- In re Smith, 123 B.R. 423 (Bankr. M.D. Fla. 1990) (insignificant recurring debts not counted to defeat involuntary petition)
- In re Basil St. Partners, LLC, 477 B.R. 856 (Bankr. M.D. Fla. 2012) (context on who may be creditor and standards for §303(b))
- In re E.S. Professional Services, Inc., 335 B.R. 221 (Bankr. S.D. Fla. 2005) (grounds for dismissal when §303(b) requirements not met)